Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about whether companies should split the roles of Chair and CEO. Her previous OUP posts can be found here, here and here.

It is widely recognised that corporate scandals and collapses often occur when there is a single powerful individual in control of a company. This is exacerbated when there is a lack of independent non-executive directors on the board. Therefore it seems axiomatic that powerful individuals can be constrained, and the temptations they may face conquered, by having in place a sound corporate governance structure achieved through dividing the roles of Chair and CEO.

UK Context

Back in 1992, the much lauded Report of the Committee on the Financial Aspects of Corporate Governance, often referred to as the Cadbury Report after the Chair of the Committee, Sir Adrian Cadbury, identified the potential danger of combining the roles of Chair and CEO in one person. The Cadbury report recommended ‘there should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision’. This principle was embodied in corporate governance best practice in the UK, with the Combined Code on Corporate Governance (2008) stating ‘there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision’, and furthermore the Combined Code explicitly states ‘the roles of chairman and chief executive should not be exercised by the same individual.’

Whilst combining the roles of Chair and CEO is rare in the UK’s largest companies, Marks and Spencer PLC is a notable exception. In May 2004 Sir Stuart Rose was appointed to the position of Chief Executive and subsequently in 2008 he became both chairman and CEO until July 2011. This combination of roles goes against the Combined Code’s recommendations of best practice. As a result in 2008 some 22 per cent of the shareholders did not support the appointment of Sir Stuart Rose as chairman. Nonetheless he remains in the combined role although there is still considerable shareholder unrest and 2009 has seen more dissent by shareholders on this issue.

US Context

In the US, the roles of Chair and CEO have often been combined but now more and more companies are appointing separate individuals to the two roles. A recent example of a US company which has decided to appoint an independent chairman is Sara Lee, the famous producer of gateaux, beverages and body care products. Sara Lee has decided to make this change as a response to investor pressure and also the growing trend in the US to split the two roles. Kate Burgess in her article ‘Sara Lee to separate executive roles’ explores this case in more detail.

Institutional Investor Pressure

In the UK there has long been pressure brought to bear by institutional investors on companies which have tried to combine these roles. This pressure, together with the long history in UK corporate governance codes against the combination of roles, means that few large companies seek to combine the roles (although as noted above, Marks and Spencer plc is an exception).

Recently Norges Bank Investment Management (NBIM), a separate part of the Norwegian central bank (Norges Bank) and responsible for investing the international assets of the Norwegian Government Pension Fund, has started a campaign to convince US companies to split the roles of Chair and CEO and appoint independent chairmen. Kate Burgess  in her article ‘Norwegian fund steps up campaign’ highlights how NBIM has submitted resolutions to four US companies calling on them to appoint independent chairmen. The four companies are Harris Corporation, Parker Hannifin, Cardinal Health Inc, and Clorox. In addition NBIM has also voted against combined Chair/CEOs at some 700 US companies. Interestingly Sara Lee had also been the focus of action by NBIM before agreeing to appoint separate individuals to the roles in future. Also in Kate Burgess’ article, Nell Minow of The Corporate Library states ‘NBIM can leverage a lot of shareholder frustration and a widespread sense that this is a sensible, meaningful but not disruptive initiative’.

It seems to be only a matter of time before the vast majority of companies will split the roles of Chair and CEO. Of course the individuals appointed to those roles must be both capable of fulfilling the tasks expected of them, and of ensuring that ultimately the two roles, carried out by separate individuals, unite the company under a common leadership approach. That may prove more difficult than many imagine and so the appointments process must consider fully the many traits needed to ensure success.

Jennifer Burns is Assistant Professor of History at the University of Virginia.  Her new biography, Goddess of the Market: Ayn Rand and the American Right, follows Rand through her meteoric rise from struggling Hollywood screenwriter to best-selling novelist.   Burns highlights two facets of Rand’s work that make her a perennial draw for those on the right: her promotion of capitalism, and her defense of limited government.  In honor of Jennifer Burns’s The Daily Show appearance (be sure to tune in 11 tonight!) we have posted an excerpt below.

“I am coming back to life,” Rand announced as the Nathaniel Branden Institute entered its second year of existence.  Watching Nathan’s lectures fill, Rand began to believe she might yet make an impact on the culture.  Roused from her despair, she began once more to write.  In 1961 she published her first work of nonfiction, For the New Intellectual, and in 1962 launched her own monthly periodical, The Objectivist Newsletter. Over the course of the decade she reprinted articles from the newsletter and speeches she had given in two more books, The Virtue of Selfishness and Capitalism: The Unknown Ideal.  Although she occasionally talked of a fourth novel, Rand had abandoned fiction for good.  Instead she reinvented herself as a public intellectual. Gone were the allegorical stores, the dramatic heroes and heroines, the thinly coded references to real politicians, intellectuals, and events.  In The Objectivist Newsletter Rand named names and pointed fingers, injecting herself directly into the hottest political issues of the day.  Through her speeches and articles she elaborated on the ethical, political, and artistic sides of Objectivism.

Rand’s ideas were particularly attractive to a new generation of campus conservatives, who saw rebellion against a stifling liberal consensus as a basic part of their identity.  Unlike older conservatives, many right-leaning college students were untroubled by her atheism, or even attracted to it.  As Rand’s followers drew together in campus conservative groups, Ayn Rand clubs, and NBI classes, her ideas became a distinct stream of conservative youth culture.  Through her essays on government, politics, and capitalism Rand herself encouraged the politicization of her work.  In 1963 she even endorsed a new Republican on the scene, Barry Goldwater, a move that situated her as the leader of a growing political and intellectual movement.

At first look Objectivism may appear a freakish outgrowth of the turbulent 1960s, but it had significant parallels in American history.  Nearly a century before, similar reading clubs and political activism had sprung up around Edward Bellamy’s Looking Backward, a book uncannily similar to Atlas Shrugged, if diametrically opposite politically…

Rand made her network television debut in 1960, appearing on Mike Wallace’s celebrated interview show.  Her dark eyes flashing, she refused to be intimidated by the liberal Wallace and expertly parried his every question and critique.  Her performance caught the eye of Senator Barry Goldwater, who wrote Rand a letter thanking her for defending his “conservative position.”  Rand had not mentioned the senator by name, but he immediately recognized the similarity between their views.  Goldwater told Rand, “I have enjoyed very few books in my life as much as I have yours, Atlas Shrugged.”  He enclosed an autographed copy of his new book, the best-selling Conscience of a Conservative.  Shortly thereafter the two met briefly in New York.  Rand followed up this encounter with a lengthy letter urging Goldwater to support capitalism through reason alone.  Although she considered him the most promising politician in the country, Rand was distressed by Goldwater’s frequent allusions to religions.  The Conscience of a Conservative had been written primarily by L. Brent Bozell, William F. Buckley’s brother-in-law, and accordingly reflected the fusionist consensus of National Review.

In her letter to Goldwater Rand hammered on the need to separate religion and politics, a theme that would animate her for decades.  She singled out National Review for special criticism because it was a supposedly secular magazine that surreptitiously tried “to tie Conservatism to religion, and thus to take over the American Conservatives.”  If such an effort succeeded, Rand asked, what would become of religious minorities or people like herself who held no religion?  Goldwater’s response, which reiterated his Christian religious beliefs, was brief yet polite.  Rand had a powerful admirer, but not a convert.

As her depression lifted, Rand began to explore different ways she might exercise cultural influence.  She was newly interested in politics because of her esteem for Goldwater and her dislike of the dashing presidential contender, Jack Kennedy, to her a glamour candidate who offered no serious ideas.  She made her first venture back into political commentary with a scathing attack on Kennedy, “JFK: High Class Beatnik,” a short article published in the libertarian journal Human Events.  In the summer of 1960 she even dispatched Nathan to investigate the possibility of her founding her own political party. It was unclear if Rand saw herself as a potential candidate or simply a gatekeeper for others.  Nathan sounded out a few of Goldwater’s political advisors, who told him that Rand’s atheism severely limited her prospects.  Abandoning that idea, Rand returned once again to intellectual pursuits.  She sent her attack on JFK to the head of the Republican National Committee to be used as needed in Republican publications.

Shaking off her lethargy, Rand now began paying attention to the new following she had gained through Atlas Shrugged.  The book was an instant best-seller despite the largely negative reviews it received.  As with The Fountainhead enormous quantities of enthusiastic fan mail poured in.  Although Rand could not respond personally to ever letter, she was interested in her readers, particularly those who wrote especially perceptive or ignorant letters.  Nathan often interposed himself between Rand and the most objectionable writers, but in the early 1960s it was entirely possible to send her a letter and receive a personal response.  Sometimes she even engaged in a lengthy correspondence with fans she had not met, although her more usual response was to refer the writer to work she had already published.

The Nathaniel Branden Institute both capitalized on and fostered Rand’s appeal.  Nathan used the addresses from her fan mail to build NBI’s mailing list and advertise new courses.  As the lectures expanded into new cities, he took out newspaper advertisements describing Objectivism as the philosophy of Ayn Rand.  In 1962 he and Barbara published a hagiographic biography, Who is Ayn Rand?, which included an essay by Nathan on the fundamentals of her philosophy.  Slowly public perception of Rand began to shift, establishing her as a philosopher, not just a novelist.  The NBI ads and lectures made Objectivism into a movement, a larger trend with Rand at the forefront.

By Edward Zelinsky

Few governmental agencies are as widely criticized as the IRS. Some of this criticism is inevitable resentment towards the tax collector. It is, Edmund Burke famously observed, as impossible “to tax and to please” as it is “to love and be wise.” The IRS rarely pleases and is never loved.

Moreover, the IRS has become a particularly tempting target for opportunistic politicians. Rather than engage in the difficult work of controlling public expenditures and rationalizing the tax law, it is easier for elected officials to engage in faux populist bashing of the IRS for its enforcement of tax laws for which Congress and the President are responsible.

However, a substantial portion of contemporary criticism of the IRS is justified. It is, for example, troubling that the IRS consistently attacks as unreasonable the compensation paid to owners of closely-held corporations while acquiescing to the tax deductibility of far larger salary payments to the executives of publicly-traded firms.

It is, in the final analysis, critical to the operation of a modern society that taxes be collected fairly and efficiently. It is accordingly important for those of us who have criticized the IRS (and expect to do so in the future) to speak up when the IRS gets something right.

And recently the IRS has done something important right: cracking the secrecy of the Swiss banks which help affluent Americans to cheat on their U.S. taxes.

This is a simple matter of fairness. Middle and working class Americans, when they save outside their IRAs and 401(k) accounts, typically put cash into local banks and credit unions. From such institutions, these taxpayers receive Form 1099 annually and generally comply with the legal obligation to pay federal income tax on the interest credited to their bank and credit union accounts. Such middle and working class taxpayers may also be subject to back-up withholding under which the institutions paying them interest retain some of that interest and send it to the IRS.

In contrast, for years, a disturbingly large number of affluent Americans have knowingly cheated on their U.S. tax obligations by placing savings in foreign bank accounts which they do not report to the IRS, even though these citizens are legally obligated to disclose foreign accounts to the IRS and to pay U.S. income tax on the interest earned by such foreign accounts. The result has been something of a two-tier system under which, to paraphrase Leona Helmsley, only the little people pay taxes on bank account interest.

Central to the creation and promotion of this two-tier scheme have been the efforts of Swiss bankers with the active connivance of the Swiss government. Tax evasion and money laundering are major Swiss industries which Swiss bankers have conducted with the support of Switzerland’s bank secrecy laws. Those laws have assured high income U.S. taxpayers that they will not be caught if they violate U.S. law by putting savings into undisclosed Swiss bank accounts and failing to pay the federal income taxes owed on the interest paid on such accounts.

Recently, the IRS has begun to crack the wall of secrecy surrounding Swiss bank accounts by obtaining the names of U.S. citizens holding such accounts and enforcing the tax law against these individuals. Every American who has been paying his federal income taxes on his interest-bearing accounts should applaud this development.

This being the IRS, there are those who have criticized the IRS’s efforts as overdue and as obtaining the names of only a fraction of the U.S. citizens who have cheated on U.S. taxes via Swiss bank accounts. Others have faulted the IRS for giving American citizens an amnesty period during which such citizens will generally be spared the worst penalties if they now come forward and pay the back taxes owed on previously undisclosed Swiss bank accounts.

It would indeed be unfortunate if, having achieved impressive initial success, the IRS were to rest on its laurels, rather than continue its efforts to obtain more names of U.S. citizens with undisclosed Swiss bank deposits. Whatever the merits of the amnesty deployed by the IRS (it probably is a necessary evil), this should be a one-time offer to those who have cheated on U.S. taxes, an offer not to be repeated.

When I was in government, I invariably heard from persons who were unhappy with my performance but rarely received a word of commendation from those who favored my decisions. This always troubled me. So, as one who has not hesitated over the years to criticize the IRS, let me commend the IRS for its crackdown on Americans who have been cheating on U.S. taxes through Swiss bank accounts. On this one, the IRS is getting it right and deserves the support of all U.S. taxpayers.

Douglas E. Phillips is author of The Software License Unveiled: How Legislation by License Controls Software Access, which reframes the debate between proprietary and free software to ask whether “legislation by license” should control either kind of software access.  In the article below he looks at Google’s new Chrome operating system.

Google recently announced plans for a new PC operating system, the Chrome OS. Within minutes, the media reported an OS war and began telling us who loses and who wins. The Chrome OS will smash Windows! Or else Chrome is actually good for Microsoft and (despite running on a Linux kernel) threatens Linux! Who knows? We might actually have to wait until the new OS comes out, which Google says won’t happen for another year.

Whatever becomes of the Chrome OS, though, Google’s decision about how to license it tells us something about where the software license itself is going. And that’s worth looking at now, given that how software is licensed shapes how it’s created and used.

Google promises open source licensing, which points to an approach the company already uses for the Chrome browser. This approach combines a royalty-free source code license to developers with proprietary end user terms. Expect to see more of this hybrid model across the software industry in the years to come.

Source code for the browser is available under the BSD license, which is short, sweet, and (in licensing jargon) permissive. You can use BSD-licensed code in a new work and distribute the new work any way you choose.

The separate terms of service for the browser’s executable version don’t impose a fee, but they do authorize Google to deliver targeted advertising when you use it. So the browser – and most of Google’s other services – are free, but only in the sense that broadcast television is free (or was free, before cable and satellite found a way to charge for it). You pay (some would say dearly) for broadcast TV, not by sending money to ABC, CBS, NBC, or Fox, but by tolerating a high-fat diet of ads we hate.

You pay Google in more or less the same way, except that the advertisements usually tend to be more relevant. In return, you get access to content that compares to network TV, in scope and depth, as the Pacific Ocean compares to a puddle (taking into account that the Pacific Ocean also has its shallow parts and sharks). Most people seem to like this bargain. It works, however, only if you agree to let Google keep track of what you’re looking for online and serve ads in response. Without this proprietary element, there would be no Google as we know it and, among other things, no Chrome browser or Chrome OS. The hybrid license lets all this happen.

The main objection to permissive and hybrid licensing comes not from the Microsofts of the world, but from advocates of the GNU General Public License. You can borrow source code from a GPL-licensed work and include the code, royalty-free, in a new work. But if you want to share the new work with others, then the GPL requires that you also license the new work – including the parts that weren’t borrowed – under the GPL. In the GPL philosophy, protecting software freedom means denying the freedom to mix free code with any code that is subject to proprietary licensing terms.

According to Google, the Chrome OS will consist of the Chrome browser “running within a new windowing system on top of a Linux kernel.” Because the Linux kernel is GPL-licensed, Google will have to provide that part under the GPL. The GPL’s “copyleft” condition applies, however, only if the new work is a “derivative work” as a matter of copyright law. The Chrome browser clearly is a separate work, and the new windowing system apparently will be as well (as is the existing X11 windowing system, which is often used with Linux but not licensed under the GPL).

Google’s not likely to license the non-Linux parts of the Chrome OS under the GPL, and for good reason. Consider the Web itself. Tim Berners-Lee, who invented the Web, at first wanted the Web software to be licensed under the GPL. He changed his mind after people told him that the strings attached by the GPL could severely limit the Web’s reach. So he arranged instead to have the Web software dedicated to the public domain. The Mosaic graphical browser included parts of the original Web software, which meant that avoiding the GPL was key to making Mosaic something on which for-profit companies could build. Without the freedom to monetize Web technologies, the private investment that helped the World Wide Web live up to its name almost certainly never would have occurred. That’s why a combined open source and proprietary licensing model probably makes sense for the Chrome OS. It’s also why your next software license, like your next car, may well be a hybrid.

Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about the important of votes in corporate governance. Her previous OUP posts can be found here and here.

Voting ones’ shares is seen as one of the main tools of corporate governance. In recent times, votes have been cast against adoption of the annual report and accounts, against the appointment, or re-appointment, of certain directors, and against certain proposed strategies. Votes can also be used via the ‘say on pay’ to signal displeasure at executive remuneration packages. Although the ‘say on pay’ is an advisory vote, it may nonetheless be quite effective at making boards think twice about the proposed pay packages for executive directors.

However companies do not always take as much notice of the votes cast as one would like. For example, the recent annual general meeting of Marks and Spencer is a case in point as regards the use of voting as a (vociferous) voice. Andrea Felsted and Samantha Pearson in their article ‘M&S chief defiant amid revolt by investors’ highlight that nearly 38% of votes cast backed a resolution seeking the appointment of an independent chairman within the next year. Sir Stuart Rose, who has been the centre of much criticism since taking on the roles of both chairman and chief executive, did not seem overly bothered by the investors’ views on this matter. There was also much shareholder dissent over the re-election of the chairman of the remuneration committee and over the adoption of the remuneration committee report.

Withheld votes
Whilst the importance of the vote is universally accepted, let us consider what happens in the UK when a vote is withheld. A withheld vote may signal that an investor has reservations about a resolution, or it may be a stronger expression that an investor is unhappy about a resolution, whilst falling short of actually voting against the resolution. However when the ‘vote withheld box’ is ticked on proxy forms in the UK, the withheld votes are not counted as part of the votes cast. For example, after its annual general meeting in May 2009, Shell published the voting results on its website. On Resolution 1 : Adoption of Annual Report & Accounts, there were: ‘votes for’ 3,301,631,965, ‘ votes against’ 3,394,595, and ‘votes withheld’ 16,026,721. However when indicating the percentage split of the votes, ‘votes for’ are shown as 99.90% and ‘votes against’ as 0.10%. The votes withheld were nearly 5 times that of the votes against but nowhere are they reflected in the percentage totals of votes cast. Similarly, on Resolution 4 : Re-appointment of Lord Kerr of Kinlochard as a Director of the Company, there were ‘votes for’ 3,161,974,849, ‘votes against’ 77,443,311, and ‘votes withheld’ 77,876,289. The percentage allocation indicated 97.61% ‘votes for’ and 2.39% ‘votes against’. The ‘votes withheld’ which again exceeded the ‘votes against’ were not reflected at all in the percentage totals. It should be said that Shell does clearly state that “a ‘vote withheld’ is not a vote under English Law and is not counted in the calculation of the proportion of the votes ‘for’ and ‘against’ a resolution.”

The Combined Code on Corporate Governance (2008) under Code provision D.2.1, states that ‘For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The proxy form and any announcement of the results of a vote should make it clear that a ’vote withheld’ is not a vote in law and will not be counted in the calculation of the proportion of the votes for and against the resolution. However it’s interesting to note that a decade ago, the Report of the Committee of Inquiry into UK Vote Execution (1999), published by the National Association of Pension Funds, stated that whilst it was initially attracted to the idea of adding a third box (being an ‘abstention’ or ‘vote withheld’ box), it then decided that there were several arguments against the inclusion of such a third box. Firstly it might provide investors with an ‘easy option’ so that rather than voting against, they withheld their votes; and secondly since withheld votes are not counted, and have no legal effect, then it could drive down the level of recorded votes.

However as we have seen, the Combined Code does advocate the inclusion of a ‘vote withheld’ box on the proxy form. Therefore, it could be that in practice the addition of a third box which allows a withheld vote but which is not counted, may lead to the understatement of the level of dissatisfaction with some resolutions. Given that institutional investors are coming under more and more pressure to be seen to be active owners of shares, it may be that a ‘vote withheld’ will increasingly become seen as sitting on the fence, rather than taking a decision to vote against. In the US, it would seem that abstentions do have a legal effect under a majority voting system. For example, in a director election if there were more votes withheld than were voted for the candidate, then the candidate would not be elected, hence the abstentions (votes withheld) would have a legal effect.

Broker votes
Turning to US issues, the SEC has recently made some important changes to proxy voting. Weil, Gotshal and Manges (2009) report that ‘the SEC approved a change to NYSE Rule 452, eliminating broker discretionary voting of uninstructed shares in uncontested director elections, which will have the effect of reducing the number of votes cast in favor of the board’s nominees in the election of directors and strengthen the influence of institutional investors and activist shareholders.’

Blank votes
However James McRitchie has brought to our attention the problem of blank proxy votes which go to management. He highlights that fact that the broker vote issue that the SEC took care of is ‘where retail shareowners don’t submit a proxy (or voter information form) at all. When that happens, the broker or bank can vote within 10 days of the meeting. The “blank vote” issue arises when the shareowner votes at least one item on their proxy but leaves some other items blank……..[the voting] platform for institutional investors doesn’t allow submission of blank votes, [but the] platform for retail holders does and the SEC allows them to fill in the blanks as instructed by brokers and banks (always with management)’. Furthermore he states that ‘As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.’

Clearly the area of voting is a complex one and changes are being brought in over time to remove barriers to voting and to help ensure that votes are cast in a way which fairly reflects the owners’ intentions. A decade ago it would have seemed highly unlikely that many institutional shareholders would publish their voting levels in individual companies and on individual resolutions but many institutional shareholders now do this. In the US a number of institutional shareholders have gone a stage further and disclose their voting intentions prior to a company’s AGM. Hopefully institutional shareholders in other countries will adopt this approach in future.

By Edward Zelinsky

The swine flu is back. Gerald Ford was president the last time Americans confronted the swine flu. In response to the current emergence of this disease, public health authorities advise us to take precautions including the avoidance of crowds and of unnecessary travel. For many Americans, the most significant exposure to the danger of communicable disease occurs at the workplace.

While this workplace-based exposure cannot be eliminated, it can be minimized. To combat swine flu, we should encourage employees to telecommute from their homes rather than travel to their employers’ offices with their attendant danger of communicable disease.

Modern technologies – the internet, email, cell phones, electronic data bases – enable many employees to work from their homes for at least part of the week. Telecommuting extends job opportunities to individuals for whom traditional commuting is difficult, for example, the disabled, parents of small children, persons who live far from major employment centers. Telecommuting is also good for the environment, reducing the carbon footprints of employees who spend some of their work days at home and need not physically commute to work on those days.

Now, telecommuting can achieve yet another important benefit by reducing individuals’ potential exposure to swine flu on the days they work at home rather than travel to their employers’ offices.

A major impediment to telecommuting is New York State’s extraterritorial taxation of nonresidents’ incomes. When a nonresident works at home for a New York employer, New York imposes income tax on the telecommuting nonresident for this out-of-state day even though the nonresident never sets foot in New York on that day and even though New York provides no public services to the nonresident telecommuter on his day working at his out-of-state home. The result of New York’s extraterritorial taxation is typically double income taxation of the nonresident for telecommuting from outside the Empire State, a classic confirmation that no good deed goes unpunished.

I am something of a poster boy for the irrationality of New York’s extraterritorial taxation of nonresident telecommuters. I am a law professor in Manhattan at the Benjamin N. Cardozo School of Law of Yeshiva University. I live in New Haven, Connecticut. When New York sought to impose its income tax on me for the days I wrote and researched at home in Connecticut, I challenged this extraterritorial tax on constitutional grounds. Virtually all independent legal commentators concluded that this challenge should have prevailed since the Due Process and Commerce Clauses of the U.S. Constitution prevent the states from taxing activity which occurs outside their respective borders.

Nevertheless, despite these constitutional principles, New York’s courts held that New York can tax me (and other telecommuters) on days worked at home outside the Empire State. New York’s Court of Appeals, that state’s highest court, specifically approved New York’s tax-based discouragement of nonresidents’ telecommuting from their out-of-state homes.

Enter the swine flu.

For the duration of swine flu problem, New York should encourage telecommuting or at least not impede it. In particular, New York Governor David Paterson should announce that, to stimulate telecommuting to combat potential exposure to the new swine flu, New York will suspend its extraterritorial income taxation of nonresidents for all days such nonresidents work at their out-of-state homes.

In any event, Congress should pass the Telecommuter Tax Fairness Act which, if enacted into law, would prevent states from taxing telecommuting nonresidents on the days they work at their out-of-state homes.

And who knows? After the swine flu danger is over, Governor Paterson and New York’s other policymakers may discover the long-term benefits to New York of reforming permanently New York’s extraterritorial (and unconstitutional) taxation of telecommuters like me.

Lawrence J. Fox practices law as a long-time partner at Drinker Biddle & Reath as well as being the I. Grant Irey Adjunct Professor of Law at the University of Pennsylvania and a Lecturer on Law at the Harvard Law School.  Susan R. Martyn has taught law for nearly thirty years, first at Wayne State University in Detroit, and currently as Stoepler Professor of Law and Values at the University of Toledo College of Law.  Together they wrote, How To Deal With Your Lawyer: Answers To Commonly Asked Questions.  Below is an excerpt about a very sticky topic, lawyer’s fees.

Your Lawyers’ Fees Must Be Fully Explained

Q: My sense is lawyers love to charge big bucks, but don’t like talking about it much.

A: You are right there.  But even before you become a client, you are entitled to a number of protections regarding fees. Your lawyer must discuss the available methods of billing – hourly fee, fixed fee, contingent fee – and the benefits and drawback of each.

Q: Tell me more about hourly billing.

A: This is the most common way lawyers charge.  Each lawyer and paralegal has a billing rate.  They are supposed to keep accurate track of their time, usually in fractions of an hour, and describe what they do during that time.  Then, at the end of the month, the lawyer will send you a bill containing the descriptions and the important mathematical result.

Q: What’s that?

A: The number of hours time the billable rate for each individual who dedicated time to the matter all neatly added up.

Q: Couldn’t this be a great deal for the lawyer?  She works real slow and I pay for every hour.

A: That’s where reasonableness comes in – and a lawyer’s fiduciary duty. Your lawyer is required to proceed efficiently and pursue only those objectives you have agreed to, following the strategic plan you two have discussed.

Q: How will I ever know?

A: You are right to ask.  This system is built on trust and documentation.  You are not sitting around watching your lawyer’s every move, stopwatch in hand.  But if you don’t trust your lawyer, billing is only part of the problem, and you would be well served to keep searching until you find one you do trust.

Q: What’s this about fixed fees?

A: Sometimes lawyer and client can agree that the lawyer will provide all services required for a fixed fee, if the service is routine, or the lawyer and client have a large client database of experience with this type of matter.

Q: Sounds like this could be an incentive for slipshod work.

A: With any fixed fee, we’re back to trust again – and the recognition by the lawyer that a malpractice action might loom is she does not deliver quality work.

Q: And if it takes longer, the lawyer might lose interest?

A: That’s certainly possible.  You’ve now identified the problems with fixed fees. But they have their place and they permit the client the benefit of budgeting for the cost of these services, which can be quite reassuring in the right circumstances.  So the ethics rules generally permit them, except in one instance.

Q: What’s that?

A: May jurisdictions prohibit fixed fees in situations in which the lawyer is hired by an insurance company to represent an insured who is the real client. The worry is that the lawyer’s professional independence will be compromised by the arrangement, so rather than worry about it, fixed fees are just prohibited.

Q: I’ve also heard about contingent fees. How do they work?

A: These are arrangements that we say hold the keys to the courthouse door for so many who could not otherwise afford lawyers.

Q: How’s that?

A: Under a contingent fee arrangement, the lawyer collects a fee only if the client has a recovery.  And the fee is directly tied to the amount of the recovery.  The more the client gets, the more the lawyer gets.  Those interests are perfectly aligned.

Q: That sounds great.  Why doesn’t everyone hire a lawyer on a contingent fee?

A: Well, first of all, even in cases that are appropriate for contingent fees, lawyers are required to explain the alternatives to the client since some clients would prefer to pay a lawyer on some other basis.  Then there are some matters where the law prohibits contingent fees, primarily divorces and criminal matters; the former because we always hope a lawyer’s fee arrangement would not discourage reconciliation and the latter because we don’t the fee agreement to interfere with the client’s ability to accept a plea bargain.

Q: How much is the lawyer’s percentage?

A: Again, we are back to reasonable.  Typically, lawyers will charge anywhere from 25 to 40%.  But in cases where recovery is more certain, such a high percentage might be unreasonable.  And the percentage does not have to be fixed across all recoveries.  Some states have legislated what the percentages shall be in certain cases, and those percentages may go down as recoveries go up.  For example, the lawyer gets one-third of the first $100,000, 25% on the next $100,000, 10% on anything over $200,000.  Others have endorsed contingent fee arrangements where the percentage rises as the recovery increases on the theory that the last dollar recovered is a much better accomplishment that recovering the first.

Q: So under a contingent fee, I get my lawyer for free?

A: Well, the legal services are free, if you should lose.  But we haven’t discussed expenses, which includes everything from court filing fees and expert witness charges to costs for disbursements, such as phone calls and photocopy expenses.

Q: There’s always a catch.

A: That’s because the amount a client pays for every matter has two components: the professional fee and the expenses. Lawyers are allowed to include expenses in the contingent fee, which means that you don’t pay them anything – fee or expenses - unless you win.  Lawyers also are allowed to charge you for these expenses separately.  Either way, you have a right to bargain for and know up front what to expect…

Q: What happens if, after my lawyer and I agree on a fee, my lawyer then decides the deal still isn’t to her liking?

A: Great question.  While clients can terminate lawyers at any time for any reason, a lawyer may not change a fee agreement previously entered into because “the deal” doesn’t look as good as it once did.  The courts look at any fee modification with signifigant disfavor.  Unless the lawyer can demonstrate that the scope of the engagement materially changed or that it was otherwise in the client’s best interest to change the arrangement, the lawyer must fulfill the terms of the original retainer.

Michael A. Carrier is a Professor of Law at Rutgers University School of Law, Camden. He has published and spoken widely on the antitrust and intellectual property laws, and is one of the leading authorities in the country on the intersection of these laws. His new book, Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law, looks at how innovation has been threatened by the United States legal system and seeks to reverse the trend, offering ten revolutionary proposals, from pharmaceuticals to peer-to-peer software, to help foster innovation. In the post below Carrier reports on a Swedish court decision which will affect BitTorrent sites.

A Swedish court today found four operators of the high-profile website The Pirate Bay guilty of assisting in making copyrighted content available and sentenced each to a year in jail and roughly $900,000 in fines.

At issue is the revolutionary BitTorrent protocol, which allows users to easily download large files such as movies by breaking up the files into many pieces. The availability of pieces from numerous sources speeds up transfer as compared to retrieving the file from one source. Information on these pieces is provided by small files called “torrents,” which are indexed and tracked on The Pirate Bay website. Many of the downloaded files are copyrighted.

The court found that the defendants were liable for “making available” copyrighted works, which occurs when the “work is transferred to the public.” The court also concluded that the defendants “provid[ed] a database linked to a directory of torrent files, making it possible for users to search for and download torrent files as well as to provide functionality through which the users who wanted to share files could have contact with each other by sharing the service tracker function.”

To be clear, The Pirate Bay does not directly infringe copyright holders’ rights. It does not even host copyrighted material on its website. And it is far from the only website engaging in much of the activity for which it was punished. Numerous search engines, for example, can be used to locate torrent files. But rather than focusing on the merits of the court’s decision, which could have far-reaching consequences for search engines, individuals, and any others “making available” copyrighted materials, let me focus on an even larger issue: the difference between litigation and innovation.

The entertainment industry is effective in litigating. But if it was as effective in innovating, there might be less need for litigation.

Copyright holders have reacted with alarm to new technologies for quite some time. John Philip Sousa bemoaned the introduction of the player piano, which would lead to “a marked deterioration in American music.” Jack Valenti warned that the market for copyrighted movies would be “decimated, shrunken [and] collapsed” by the VCR. And the recording industry, lamenting a decline in CD sales, sued numerous peer-to-peer (P2P) file-sharing services.

But in fearing the potential of the new business models, copyright holders offer a classic example of market leaders that fail to appreciate disruptive innovation. Clayton Christensen famously showed that, when faced with a new technology that threatens to upset a profitable business model, market leaders tend not to appreciate the full potential of the new paradigm.

A decade ago, for example, the recording industry responded to Napster, which was striving to be “the online distribution channel for the record labels,” not by striking a deal that would have seamlessly transported the industry into the digital era, but by suing it. While the record labels may have won the battle in shutting down Napster, they began to lose the war, as former users migrated to other P2P networks.

Today’s Pirate Bay ruling is likely to have similar effect. Like the proverbial whack-a-mole game, it is not possible to sue into oblivion every website and search engine providing access to torrents.

What, instead, could a new business model look like? Numerous musicians have offered examples. Just to pick one, look at Trent Reznor of Nine Inch Nails. As Mike Masnick (editor of TechDirt) explains, Reznor has creatively offered ways to connect with fans and give them reasons to buy – limited edition packages, treasure hunts for hidden tickets, and aggregation of concert photos and videos, to name just a few.

The entertainment industry will predictably trumpet its win in (at least the initial stage of) this litigation. But again, litigation is not innovation. Even the plugging of one leak on the Titanic of a 20th-century business model will not transport the industry to a new and innovative 21st-century model.

David Sugden is the managing partner of Call, Jensen & Ferrell of Newport Beach, California. In his book, Gray Markets: Prevention, Detection & Litigation, he examines the business strategies and legal theories to protect against brand abuse. In the post below, he reflects on technology’s impact on the gray and black markets.

Not long ago, brand owners could take comfort in the intrinsic barriers hampering gray and black marketers. While most large cities have places known by its dwellers to be a source for cheap goods of dubious origin, consumers had to consciously decide to explore these markets in addition to or in lieu of conventional establishments. Canal Street in New York’s Chinatown is a well-known example. The street is lined with densely packed shops offering watches, purses, and other luxury items at prices that are corruptively low. Until relatively recently, these markets did not pose a significant threat to brand owners. The remote locations of these markets created a sufficient bulwark to market entry. As a result, brand owners knowingly conceded that a small percentage of its would-be buyers bought cheap knock-offs instead.

Many brand owners justified their tolerance of these bazaars on the belief that someone shopping for a twenty-dollar Rolex watch is not even a would-be customer. This customer is simply looking for a cheap gimmick or perhaps his or her economic reality precludes any possibility of buying a genuine product for several thousand dollars more. Brand owners were also untroubled because the knock-offs were so obviously inferior to the genuine goods they sought to mimic. While a Guci purse may have looked just like a Gucci purse from across a dimly lit cocktail lounge, a casual glance in an unobstructed environment could quickly distinguish the two. Because such a terse inspection could expose these products as feeble imitations, brand owners concluded that no real threat existed.

However, times have changed. Customers looking for bargains found in the black or gray market now have the ability to virtually browse anywhere there is an Internet connection. Equally vexing for brand owners is the modern difficulty of spotting illegitimate products. Indeed, the obstacles that were once sufficient to relieve concern for brand owners have been removed. The gray and black market economies have enjoyed incredible growth extending their reaches from Canal Street to our laptops.

A Little Perspective

In 2005, Arnold Schwarzenegger joined his friend and fellow action star Jackie Chan in Hong Kong to promote a campaign against film piracy in China. The 30-second anti-piracy public service announcement featured both actors in leather jackets zooming down a road on motorcycles, dodging exploding cars and other hazards. “When you buy pirated movies and music, you support criminals!” Mr. Chan says. Mr. Schwarzenegger adds, “Let’s terminate it!” Today, many countries are haplessly devoid of the necessary resources and infrastructure to adequately protect intellectual property. Countless articles and books can be found lamenting the lack of international enforcement to protect American innovation. It is worth remembering, however, that America is an ex-pirate itself:

“[O]ne of the undeniable reasons [Charles] Dickens had gone to America [in 1841] was to work for the acceptance of International Copyright so that his books, among those others to be sure, would no longer be pirated by unscrupulous American publishers. It was a mission in which he entirely, humiliatingly failed, and a copyright agreement between England and the United States was not concluded until 1891.”

Assaults on innovation are nothing new. What is novel is how easy mounting these assaults has become. The speed and simplicity in which people communicate, buy, sell, and ship products across oceans and borders have paved the way for a worldwide outburst of infringement. While many brand owners were savvy to take advantage of the benefits modern globalization offered, the attendant harm to brand integrity caught most companies completely flat footed.

Moving Forward

With respect to the gray and black market, whether one is a proponent or opponent of globalization is an issue of diminishing importance. Because the bell of modern technology cannot be un-rung, brand owners must learn to capitalize and cope with the rewards and risks in this new economy. To generalize, American businesses have done a fine job capitalizing on the rewards. Where American companies have fallen short has been their understanding of the need to step-up efforts to protect their brands and intellectual property. The benefits of global expansion reach far beyond legitimate trade. Illegitimate trade has been equally eager to take advantage of the efficiencies and economies of scale that globalization offers. As a result, threats to brand owners in the form of black or gray market activity have skyrocketed in size and scope since the 1990s. Revenues derived from counterfeiting and piracy have increased by more than 400 percent since the early 1990s. During the same time period, legitimate trade only increased by 50 percent.

There are few, if any, industries immune from attack. From the luxurious to the mundane and the simple to the complex, there is now a global network of illegitimate traders willing to copy or divert genuine products for their own profits’ sake. Given the ease in which these illegitimate products can be bought and sold, it is important that brand owners take preventative action.

Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about the calls for wider adoption of a ’say on pay’ in the US. Her previous OUP post can be found here.

Widespread concern at the high levels of executive director remuneration has led to calls for wider adoption of a ‘say on pay’ in the US. Investors in the UK and Australia have, for many years, had the right to vote on the remuneration committee report of the companies in which they invest. The vote on the remuneration committee report is an advisory one meaning that it is not binding on the company. However in practice institutional investors have tended not to vote against the remuneration committee reports and on the – until recently – relatively rare occasions on which the remuneration committee report was voted against, it was seen as a strong signal of disapproval about some aspect of executive remuneration and one which the directors would be unwise to ignore.

Royal Bank of Scotland
It was no surprise to anyone that the Royal Bank of Scotland shareholders overwhelmingly rejected the banks remuneration committee report at the companies Annual General Meeting on 3rd April. Jane Croft and Andrew Bolger in their article ‘Thumbs down for RBS pay report’ stated that some 90.42% of votes cast rejected the report. UK Financial Investments Ltd (UKFI) the Government owned company which manages the taxpayers’ shareholding in RBS, and controls 58% of the RBS shares, voted against the report. Manifest, the proxy voting agency, stated that ‘the resolution on the remuneration report at Royal Bank of Scotland Group plc represents the highest ever “Total Dissent” vote on the remuneration report since the introduction of the requirement for the report to be put forward to a non-binding vote’.

Remuneration (compensation) committees
Remuneration committees have previously been criticised for having a ratcheting effect on executive directors’ remuneration. The composition of such committees is usually independent non-executive (outside) directors but nonetheless this has not stopped the increasing levels of executive remuneration. This is probably in part attributable to the fact that remuneration committees would tend to recommend remuneration for executive directors in the upper quartile of their peer group hence the ratcheting effect over time. The Corporate Library points out that, in the US, chief executives pay rose 24 percent in 2007 giving a median remuneration of $8.8 million.

Trade Unions Involvement
An interesting development is for trade unions calling for more worker involvement in setting top executive pay. Brian Groom in his article ‘TUC leader urges staff input over chiefs’ pay’ highlights that Brendan Barber, General Secretary of the Trade Union Congress (TUC), stated ‘there was “massive anger” among workers at paying the price for a recession made in the boardroom, not on the shop floor’. The directors of FTSE 100 companies came in for criticism as well as the directors of banks, with Mr Barber arguing for ‘workforce representation involved in remuneration committees of major companies’. The idea of representation of the workforce on the board or board committees has traditionally not been given much consideration by UK boards but maybe that might change in the future.

Shareholder proposals/resolutions
Another are where we may see change is in relation to shareholder proposals or resolutions. Although it is possible in the UK for shareholders to put forward shareholder proposals or resolutions, it is not that easy to do and hence dialogue has been the most frequently used tool of corporate governance with shareholder proposals maybe numbering just five or six a year.

In the US it is much easier to put forward a shareholder proposal and so we can see 800 or 900 of these each year in US companies. It is likely that in the future more of these shareholder proposals will be relating to executive remuneration and that they will achieve strong support from institutional investors who are increasingly being criticised for not having taken more action to help limit executive remuneration. Francesco Guerrera and Deborah Brewster in their article ‘Mutual funds helped to drive up executive pay’ highlight that mutual funds have tended to vote in favour of companies compensation plans and this has effectively sanctioned these spiralling executive remuneration packages. Kristin Gribben in ‘Pay proposals to dominate proxy season’ puts forward the view that, in future, mutual funds in the US will be more likely to support remuneration (compensation) related resolutions filed by shareholders.

Back-door pay
There is concern that some companies may seek to remuneration executive directors via the ‘back-door’ if, for example, bonus schemes do not pay out. Pauline Skypala in ‘Warning over “back-door” pay’ highlights that this is a concern to some investors including Co-operative Asset Management whose corporate governance manager, Paul Wade, states ‘If a company fails to create value for its shareholders, it is totally inappropriate to grant rewards to management that are disproportionate to shareholder returns’.

Future developments
With the continuing focus on executive directors’ remuneration packages, the forthcoming AGMs promise to give rise to many interesting debates, much emotive discussion, more shareholder proposals, and many more instances where ‘say on pay’ will result in an emphatic ‘no’ to excessive remuneration or remuneration which does not have appropriately stretching performance links.